BLDR

Builders FirstSource, Inc. - 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

Builders FirstSource, Inc. is a leading supplier and manufacturer of structural and related building products for residential new construction in the United States. This report covers the quarterly period ended June 30, 2009, and the six months ended on that date. The company operates in a severe housing downturn, with national single-family housing starts down 36.2% in the second quarter of 2009 compared to the prior year.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 37.8% for the quarter and 37.1% year-to-date compared to 2008, driven by a 42% drop in housing starts in company markets and lower lumber prices.
• Cost Reductions: Selling, general, and administrative (SG&A) expenses decreased 32.3% for the quarter and 30.5% year-to-date, aided by a 40.5% reduction in full-time equivalent headcount.
• Discontinued Operations: The company announced the exit of its entire Ohio market, reclassifying these results as discontinued operations. This included expensing $0.9 million in lease obligations and $0.8 million in severance in Q2 2009.
• Asset Impairments: Asset impairments dropped significantly to $0.5 million in Q2 2009 compared to $10.1 million in Q2 2008, as the major goodwill and long-lived asset impairments occurred in the prior year.
• Debt Reduction: The company reduced its borrowing capacity under its credit facility from $350 million to $250 million and repaid $20 million on the revolving credit facility during the six-month period.

Guidance, Outlook, and Risks

Outlook: Management expects difficult conditions to continue through the remainder of 2009 and into 2010. The strategy focuses on conserving cash, maintaining market share with large homebuilders, and expanding into multi-family and light commercial segments. The company projects a liquidity cushion of $50 million to $65 million over the next twelve months.

Liquidity and Covenants: As of June 30, 2009, the company had $112.1 million in cash. Borrowing availability under the revolving credit facility was minimal ($0.3 million). The company is currently not in violation of covenants; however, it does not meet the fixed charge coverage ratio of 1:1. This ratio is only triggered if excess availability falls below $35 million. The company maintains sufficient unencumbered cash to collateralize or repay obligations if necessary to avoid triggering this covenant.

Risks: Key risks include the continued decline in housing starts, inability to pass on material cost increases, and the potential need for additional liquidity if market conditions worsen beyond current projections. The company may seek new sources of liquidity, such as a shareholder rights offering or refinancing its credit facility.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to maintain the $35 million excess availability requirement to avoid triggering the fixed charge coverage ratio.
• Discontinued Operations: Confirm the final costs associated with the Ohio market exit and the impact on future cash flows.
• Market Share Gains: Assess the sustainability of the reported 9% (quarterly) and 13% (year-to-date) market share gains in the context of a 42% industry decline.
• Liquidity Runway: Review the detailed cash flow projections supporting the $50-$65 million liquidity cushion estimate.
• Valuation Allowance: Monitor the $18.8 million valuation allowance recorded against deferred tax assets and its impact on future effective tax rates.